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Author: 


Thomas,  Frank  W. 


Title: 


Cost  accounting  in  a  bank 


Place: 


Toledo 

Date: 

1910 


MASTER    NEGATIVE   # 


COLUMBIA  UNIVERSITY  LIBRARIES 
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Thomas,  Frank  W. 

Cost  accounting  in  a  bank,  by  F.  W.  Thomas  ...    To- 
ledo, 0.  [Press  of  the  Bankers  publishing  eo.]  1910. 

52  p.  incl.  port.    24^".         52.00  ] 


1.  Banks  and  banking — Accounting. 


Library  of  Congress 


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By  F.  W.  THOMAS,- 

The  Bankers  FuUishing  Company. 


TOLEDO.  OHIO. 
1910. 


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Copyright  1910 
By  F.  W.  Thomas. 


All  Publication  Rights 

•  •••         !••  • 


•  •      •     • 

•  •     •      •• 

•  •  •    •    •, 


(     •  •  •  • 

•  •    • 


Postpaid. 


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•••  • 

•  •  •  • 

•*  •  •  * 

•  •  •  • 
••  •  •  •  •  • 


3)  q^o.l  2. 


SECOND  EDITION. 


PRESS  OF 

THE  BANKERS  PUBLISHING  CO., 

TOLEDO,   OHIO. 


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CONTENTS. 


PAGE 

Necessity  for  Cost  Accounting  in  A  Bank,  -  -  -5 

General  Principles  of  Cost  Accounting  in  a  Bank,  -         -  11 

Application  of  these  principles  to  the  conditions  of  The  Specimen 

National  Bank,  -  -  -  ...  15 

Analysis  of  Individual  Accounts  in  The  Specimen  National  Bank,  22 

Analysis  of  General  Conditions  affecting  earnings  of  savings  accounts,  23 

Special  Conditions  to  be  met  in  the  Cost  Accounting  of  a  Central 

Reserve  City  Bank,         -  -  -  -  -  29 

Analysis  of  an  Account  in  a  Central  Reserve  City  Bank,  -  30 

Special  Conditions  in  an  Ordinary  Reserve  City  Bank,  -  3 1 

Method  for  analyzing  accounts  in  The  Specimen  National  Bank,  on 
which  are  deposited   an    abnormal    number  of  out-of-town 

items,  --..•.;  32 

Specimen  Analysis  of  such  an  account,       -  -  -  34 

Form  of  blank  showing  comparative  statistics  for  cost  purposes,  36 

Cost  Accounting  in  a  Trust  Company,  illustrated  with  actual  figures  of 

the  Average  Trust  Company,         -  -  -  38 

Utilizing  the  Results  of  Cost  Accounting,  -  -  43 

Analysis  of  Advertising  Methods  in  A  Bank,         -  -  47 

Method  for  computing  average  daily  amount  in  transit,        -  51 

Counting  Items,  -  -  r  -  -  51 


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The  Necessity  for  Cost  Accounting  in  a  Bank- 


An  Address  Delivered  b\f  F.  W.  Thomas,  President  of  the  Bankers 

Publishing  Company;,  of  Toledo,  Ohio,  Before  the  Ohio 

Bankers  Association  at  Columbus,  June  7th,  1910. 


The  actual  money  furnished  by  the  Government  for  the  con- 
duct of  business  is  sufficient  for  only  about  five  per  cent,  of  our  trans- 
actions. The  remaining  ninety-five  per  cent,  are  handled  by  checks 
and  drafts  furnished  by  the  banks.  All  the  vast  machinery  needed 
for  the  handling  of  these  checks  and  drafts,  for  their  transfer  from 
party  to  party,  in  the  same  city,  or  in  a  remote  city,  is  operated  by 
the  banks,  usually  with  no  specific  charge  for  this  service  and  rvith 
no  adequate  system  of  accounting  for  determining  whether  or  no 
they  secure  a  proper  recompense. 

The  mere  handling  of  items  is  the  smaller  part  of  a  bank's  busi- 
ness and  yet  in  this  one  feature,  usually  looked  upon  as  not  worth 
accounting,  the  banks  of  this  country  render  a  service  that  actually 
costs  them,  as  nearly  as  can  be  estimated,  at  least  one  hundred  mil- 
lions of  dollars  annually. 

In  the  broader  phases  of  banking, — the  relation  of  balances  to 
the  cost  of  handling  money,  making  loans,  and  other  services  ren- 
dered to  customers, — costing  the  banks  of  the  United  States  fully 
two  hundred  millions  of  dollars  additional, — there  is  almost  a  total 
disregard  of  any  exact  basis  for  determining  the  profit  line. 

Here  is,  then,  one  of  the  largest  and  most  indispensable  busi- 
ness organizations  in  the  country,  a  vast  co-ordinate  service,  costing 
about  three  hundred  millions  annually,  that  is  operated  on  a  basis 
almost  utterly  regardless  of  adequate  profit  from  the  individual  cus- 
tomer, and  trusting  largely  to  luck  that  the  business  as  a  Tvhole  will 





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carry  the  burden.  And  the  banks  do  carry  diis  load  and  do  pay 
dividends,  but  often  not  commensurate  with  the  profits  of  other  lines 
requiring  less  ability;  and  certainly  with  less  profit  than  would  be 
realized  if  ever}^  customer  paid  a  fair  compensation  for  the  service 
he  receives. 

The  customer's  balance,  the  use  of  which  is  supposed  to  rep- 
resent the  bank's  compensation,  is  often  more  fictitious  than  real.  It 
is  often  partly,  sometimes  fully  and  occasionally  more  than  offset 
by  items  in  transit,  so  that  without  an  accurate  analysis,  the  cus- 
tomer's balance,  as  it  appears  on  the  books,  is  a  very  deceptive  meas- 
ure of  the  true  value  of  his  account. 

The  banker  stands  as  the  business  counsellor  and  often  as  the 
critic  of  the  business  and  financial  operations  of  his  customers. 

A  country  banker  faced  by  a  farmer  debtor  who  had  a  herd 
of  a  dozen  cows  showing  a  loss  would  probably  suggest  the  purchase 
of  a  Babcock  tester  and  the  elimination  of  the  cows  that  did  not 
produce  a  profitable  percentage  of  butter  fat. 

A  city  banker  with  a  delinquent  manufacturer  on  his  hands 
would  probably  ask  that  man  whether  his  whole  business  was  un- 
profitable or  whether  there  were  certain  lines  that  he  could  follow 
and  produce  a  profit,  cutting  out  the  unprofitable  lines;  and  if  the 
manufacturer  should  tell  him  that  he  could  not  tell  which  Imes  were 
the  losing  and  which  the  profitable  ones,  the  banker  would  probably 
wish  to  cast  that  man  into  outer  darkness. 

And  pe/  manp  banks  do  not  kriow  hoiv  much  of  their  total  net 
profit  is  produced  by  the  commercial  department  and  how  much  by 
the  savings  department. 

And  many  accounts  with  apparently  very  large  balances  are 
really  unprofitable  when  correctly  analyzed. 

The  necessity  of  a  cost  system  in  a  bank  is  greater  than  in  al- 
most any  other  business  owing  to  the  narrow  margin  of  profit  on  the 
gross  amounts  handled  in  banking,  and  the  demonstrated  fact  that 
much  business  is  now  being  handled  without  profit  or  at  an  actual 

6 


loss  because  of  a  lack  of  positive,  definite  knowledge  of  costs  and 
the  consequent  lack  of  intelligent  effort  to  remedy  these  conditions. 

A  great  deal  of  interest  is  now  manifest  in  this  subject.  One 
by  one  the  central  reserve  and  ordinary  reserve  city  banks  are  put- 
ting such  a  system  into  practical  use  and  requiring  of  their  bank  cus- 
tomers an  amount  of  balance  based  on  correct  costs. 

Ultimately  all  of  the  central  reserve  city  banks  and  the  ordi- 
nary reserve  city  banks  will,  at  frequent  intervals,  analyze  all  of  the 
out-of-town  bank  accounts  carried  with  them,  and  the  out-of-town 
banker  will  be  obliged  to  carry  a  balance  in  accurate  ratio  to  the 
service  rendered  to  him. 

Unless  he,  in  turn,  passes  these  increased  costs  along  to  his 
customers  for  whose  benefit,  largely,  he  carries  these  reserve  bal- 
ances, with  their  attendant  collection  facilities,  then  he  will  see  his 
own  profits  dwindle. 

And  how  is  he  to  intelligently  pass  on  these  costs  unless  he  also 
introduces  a  cost  system? 

The  practicability  of  a  cost  system  in  a  bank  has  been  demon- 
strated in  several  instances  at  least,  and  the  only  reason  these  in- 
stances are  not  more  numerous  is  that  few  banks  have  made  any  ade- 
quate attempt  to  figure  costs  at  all. 

The  economy  of  a  cost  system  and  its  profit  producing  possi- 
bilities are  shown  by  the  fact  that  in  the  case  of  one  Central  Reserve 
City  Bank  having  over  a  hundred  millions  of  assets,  the  work  is  en- 
tirely handled  by  one  man  with  two  clerks,  and  the  permanent  an- 
nual gain  will  amount  to  $40,000.00  in  actual  cash  profits  less  only 
the  salaries  of  these  three  men.  And  no  customer  has  been  offended, 
by  a  request  for  an  increased  balance  based  on  a  definite  showing 
of  the  earnings  of  his  account. 

One  bank  in  an  ordinary  reserve  city  has,  for  about  five  years, 
made  a  monthly  analysis  of  each  of  its  large  accounts,  aggregating 
about  80%  of  its  entire  volume  of  business.  The  net  addition  to 
profits,  resulting  from  this  work  the  first  year  was  over  $9,000.00 
and  the  last  year  over  $30,000.00. 


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At  first  blush  most  bankers  think  of  a  cost  system  as  necessarily 
attended  with  a  small  army  of  so-called  expert  accountants,  and  the 
introduction  of  a  mass  of  card-indexes  akin  to  the  outfit  which  Mr. 
Hitchcock  was  reported  to  have  used  in  the  Taft  campaign.  They 
think  it  means  a  mass  of  intricate  detail,  a  large  cost  for  operation 
and  impracticable  results  at  best. 

And  this  attitude  is  natural,  for  the  subject  is  not  easy  of  mas- 
tery, but,  on  the  other  hand,  it  is  not  as  difficult  as  might  at  first 
appear. 

Most  of  the  data  needed  is  already  at  hand  if  rightly  used. 
It  means  no  disturbance  of  your  present  methods,  simply  a  little 
additional  work,  in  the  average  bank,  which  can  probably  be  done 
by  one  of  your  present  bookkeepers  when  he  has  mastered  the 
methods  involved. 

In  a  bank  having  assets  of  a  few  millions  the  work  could  easily 
be  handled  in  a  fraction  of  the  time  of  some  one  bookkeeper,  and 
adjustments  resulting  in  a  total  increase  in  commercial  balances 
amounting  to  only  $30,000.00  would  increase  the  bank's  earnings 
more  than  his  whole  salary,  to  say  nothing  of  other  general  benefits 
or  the  cumulative  gain  in  other  years.  And  there  are  few  fair-sized 
banks  where  the  intelligent  application  of  a  cost  system  v^ll  not  re- 
sult in  more  than  $30,000.00  increase  in  commercial  balances  the 
first  year  it  is  in  operation. 

The  objection  that  it  will  require  some  effort  and  cause  some 
expense  to  do  the  bookkeeping  connected  with  a  cost  system  is  really 
ludicrous  when  one  stops  to  think  of  the  staggering  load  of  free  book- 
keeping that  banks  are  now  doing  for  their  customers. 

The  sooner  the  banks  begin  to  do  cost  accounting  for  them- 
selves, the  sooner  they  will  create  conditions  where  they  will  receive 
pay  for  the  great  amount  of  free  bookkeeping  they  are  now  doing 
for  others. 

The  day  is  coming,  and  coming  soon,  when  bankers  will  real- 
ize, as  manufacturers  and  merchants  already  do.  that  the  first  step 
toward  adequate  and  equitable  profits,  is  a  thorough  knowledge  of 

8 


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costs,  when  bankers  will  see  that  the  true  remedy  for  much  of  the 
extreme  and  unprofitable  competition  now  in  vogue,  is  in  a  better 
l^norvledge  of  costs  on  the  part  of  all  bankers. 

The  fact  that  the  system  given  here,  or  some  modification  of  it. 
has  stood  the  test  of  practical  application,  that  it  has  produced  large 
increases  in  profits,  and  that  it  has  the  hearty  approval  of  men  who 
have  worked  at  this  problem  for  years,  and  the  undeniable  fact  that 
some  adequate  system  of  cost  accounting  in  a  bank  is  one  of  the  cer- 
tainties of  the  immediate  future,  should  commend  it  to  your  earnest 
consideration. 


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The  greatest  remedy  for  excessive 
and  unintelligent  con\petition  is  an  ac- 
curate knowledge  of  costs. 

Few  combinations  or  agreements 
have  ever  been  strong  enough  to  restrain 
the  competitor  who  honestly  believed  he 
could  secure  more  business  at  a  profit 
by  offering  extra  inducements. 

But  few  men  will  persistently  offer 
their  goods  or  their  service  for  less  than 
cost,  after  they  know  what  the  cost  is. 


10 


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Cost  Accounting  in  A  Bank. 

The  purpose  of  a  cost  system  in  a  bank  is  to  give  the  manage- 
ment an  analysis  of  total  costs  and  earnings  in  the  commercial  and 
savings  departments,  covering  definite  periods  of  time,  so  that  the 
relative  efficiency  of  each  department  may  be  compared  annually  or 
semi-annually,  in  order  that  the  management  may  have  a  true  basis 
on  which  to  make  efforts  for  larger  earnings  and  lower  expenses. 

Further,  to  provide  a  basis  for  correctly  analyzing  the  earnings, 
cost  and  profit  or  loss  on  any  or  all  individual  accounts,  to  the  end 
that  such  accounts  as  may  not  be  paying  a  proper  profit  may  be 
adjusted  on  an  equitable  basis. 

The  introduction  of  a  cost  system  does  not  mean : — 

A  material  disturbance  of  your  present  system  of  bookkeeping. 

Nor  a  mass  of  intricate  calculations,  or  the  introduction  of  an- 
noying red  tape. 

Nor  unbending  rules  for  dealing  with  customers. 

Nor  any  lack  of  flexibility  in  policy  in  handling  individual 
emergencies. 

What  a  cost  system  does  mean: — 

It  means  simply  such  a  possible  re-division  of  the  expense  ac- 
counts in  your  general  books  as  may  be  necessary  to  properly  classify 
and  to  facilitate  the  correct  distribution  of  all  expenses. 

It  means  semi-annual  or  annual  summaries  of  total  costs  and 
earnings  in  the  savings  and  commercial  departments,  prepared  in  a 
manner  to  encourage  careful  comparisons  of  results  in  different 
periods  and  to  expose  any  unnecessary  increases  in  expenses  or  rea- 
sons for  decreases  in  earnings,  so  that  if  possible  these  weak  spots 

may  be  strengthened. 

(See  Specimen  Comparative  Sheet  on  pages  36  and  37.) 

It  means  a  system  for  accurately  distributing  earnings  and  costs 
to  individual  accounts,  the  tactful  presentation  of  the  facts  to  cus- 
tomers whose  checking  accounts  show  a  loss  or  an  insufficient  profit 
and  the  adjustment  of  such  accounts  on  an  equitable  basis. 

11 


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(See  Specimen  Letter  requesting  increase  in  balance,  on  page  43.) 
It  contemplates  such  analysis  of  savings  accounts  as  will  dem- 
onstrate which  classes  of  accounts  are  most  profitable  to  the  bank, 
and  what  rate  of  interest,  and  what  rules  as  to  its  computation,  will 
produce  an  equitable  total  profit. 

General  considerations  of  policy  must  govern  many  of  the 
transactions  of  a  bank.  The  introduction  of  a  cost  system  does  not 
mean  the  elimination  of  this  element,  but  it  does  mean  that  in  decid- 
ing upon  his  policy,  in  a  general  way,  or  in  any  individual  case,  the 
banker  shall  be  fortified  by  an  exact  knowledge  of  costs  and  earn- 
ings, that  he  shall  kr^oTV  his  facts  instead  of  guessing  at  them. 

General  Considerations  in  Cost  Accounting, 
There  are  certain  methods  in  cost  accounting  which  make  for 
simplicity  and  accuracy  and  other  methods  which  are  both  complex 
and  inaccurate.  To  illustrate.  Imagine  a  manufacturer  of  clothes 
pins.  Suppose  the  cost  accountant  figures  the  cost  of  the  wood  in 
one  clothes  pin,  the  minutes  consumed  in  each  operation  on  it  and  all 
the  small  fractions  of  various  overhead  expenses,  and  his  final  cost 
is  used  as  a  basis  for  the  sale  of  a  billion  clothes  pins.  It  will  be 
clear  that  all  of  his  errors  or  omissions  will  be  multiplied  by  one 
billion.  The  smallest  error  may  be  enough  to  break  the  business. 
But  if  he  should  say,  "Last  year  it  cost  for  materials,  labor,  expenses 
of  operation  and  selling,  $75,000.00,  and  we  made  a  billion  clothes 
pins,  therefore  each  clothes  pin  cost  us  one-billionth  part  of 
$75,000.00,"  he  would  have  a  figure  he  could  use  confidently. 

The  clothes  pin  maker's  troubles  have  been  stated  very  briefly 
and  incompletely,  but  enough  to  emphasize  the  idea,  which  is  that 
general  averages  are  accurate  as  a  rvhole,  which  is  the  important 
point,  and  that  where  they  may  fail  of  perfect  application  to  each 
individual  case,  they  are,  in  fact,  more  accurate  than  minutely  car- 
ried out  detail  figures,  with  all  their  possibilities  of  error. 

Another  thing  must  be  borne  in  mind.  No  man  can  tell  you 
the  exact  cost  either  of  running  your  bank  or  of  any  individual  ac- 
count tomorroTV.  The  best  he  can  do  is  to  give  you  that  cost  for 
yjesterda^^  as  a  basis  for  your  work  tomorrow. 

12 


v| 


) 


There  is,  therefore,  a  margin  of  uncertainty  at  best,  so  there 
is  little  use  in  wasting  time  over  refinements  of  detail  that  are  of 
questionable  value  at  best. 

No  cost  system  can  be  made  which  can  be  used  without  change 
by  an^  bank.  Conditions  vary.  A  large  bank  requires  a  more 
elaborate  method  than  a  small  one. 

A  cost  system  must  be  adapted  not  adopted. 

What  each  banker  needs  to  know  is  the  cost  and  the  earnings 
in  his  bank. 

The  costs  and  the  earnings  of  other  banks,  while  of  a  certain 
value  to  him,  for  comparative  purposes,  and  as  a  check  on  the  effi- 
ciency of  his  own  efforts ;  should  never  be  used  as  a  basis  for  his  own 
dealings. 

If  there  is  anything  of  value  to  you  in  this  book,  it  is  in  the 
application  of  this  method,  or  some  suitable  modification  of  it,  to 
}^our  bank. 

Bankers  differ  as  to  the  extent  to  which  cost  calculations  should 
be  elaborated.  Some  desire  the  utmost  exactness.  Others  contend 
that  it  is  better  to  use  fairly  exact  averages,  with  a  liberal  margin 
in  favor  of  the  bcink  to  cover  possible  variations. 

The  attempt  herein  has  been  to  give  a  system  which  will  give 
results  as  accurate  as  can  be  desired  by  any  banker  and  to  do  it  with 
the  least  possible  amount  of  work. 

If  any  banker,  in  applying  these  ideas,  desires  to  eliminate  cer- 
tain portions  of  the  work,  and  is  satisfied  with  less  accurate  results, 
it  is,  of  course,  his  privilege  to  do  so. 

In  the  illustration  here  given,  cost  and  earning  percentages 
have  been  carried  out  several  decimal  places.  In  practice  it  would 
be  policy  to  add  to  the  cost  percentage  and  reduce  the  earning  per- 
centage, enough  to  bring  each  to  an  even  half  or  quarter  of  a  per 
cent,  as  costs  and  earnings  will  vary  from  time  to  time  and  the  bank 
should  have  some  margin  for  safety. 

While  the  figures  herein  have  been  prepared  with  great  care 
to  represent  real  conditions,  whether  they  do  or  not,  really  has  no 
bearing  on  the  value  of  the  method. 

13 


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Mmi0^  !''>''!'"'  '^  "y  jfcg**ai 


* 


J. 


As  far  as  possible,  inconsequent  details  have  been  omitted,  the 
desire  being  to  concentrate  attention  on  the  method  and  to  avoid  all 
confusing  technicalities. 

As  far  as  possible,  general  averages  should  be  used  in  figuring 
costs  and  earnings  in  a  bank.  Loaning  rates  fluctuate  more  or  less, 
and  as  a  banker  does  not  care  to  be  constantly  disturbing  his  ar- 
rangements with  his  customers,  the  basic  percentages  showing  the 
cost  rate,  earning  rate  and  per-item  cost  should  be  based  on  the 
bank's  general  average  figures  for  the  past  year. 

In  analyzing  individual  accounts,  the  figures  for  each  account 
can  be  compiled  for  any  period  of  time  that  may  be  convenient,  not 
necessarily  for  a  full  year. 

A^en;  commercial  accounts  of  an^  size,  or  depositing  man^  out- 
of 'town  items,  should  be  analyzed  at  the  end  of  one  month  or  three 
months,  so  as  to  immediately  re-adjust  arrangements  rvhich  are 
radically  inequitable. 

For  the  purpose  of  illustrating  the  application  of  a  cost  system 
there  are  here  shown  the  figures  for  what  we  will  call  the  Specimen 
National  Bank,  not  in  a  reserve  city.  These  are  not  the  figures  of 
any  actual  bank,  as  I  could  not  properly  publish  such  figures,  but 
the  figures  are  based  on  actual  data.  That  they  would  exactly  rep- 
resent conditions  or  results  in  any  individual  bank  is  not  claimed, 
in  fact  it  should  be  distinctly  understood  that  their  sole  purpose  here 
is  to  illustrate  a  method,  not  to  establish  actual  or  average  figures. 

The  illustration  here  used  is  of  a  National  Bank  with  a  large 
savings  department. 

The  deposits  in  the  commercial  and  savings  departments  will 
look  disproportionate  to  the  average  national  banker,  who  if  he  has  a 
savings  department  at  all,  has  a  small  amount  of  savings  deposits  in 
relation  to  his  commercial  balances. 

There  are  three  reasons  for  making  this  illustration  in  this  way. 
One  is  that  the  only  actual  figures  at  my  command  are  those  of  a 
somewhat  similar  bank,  and  were  I  to  construct  an  example  with 
a  radically  different  proportion  I  would  have  no  actual  figures  by 
which  to  check  the  results  shown  in  this  illustration. 

14 


Another  reason  is  that  these  proportions  exist  in  a  great  many 
state  banks  and  the  illustration  in  this  form  comes  closer  to  their  con- 
ditions. 

A  further  reason  is  that  I  wish  to  show  the  profit  on  savings 
handled  in  considerable  volume,  so  as  to  make  the  figures  themselves 
of  some  value. 

I  have  made  it  a  National  Bank  instead  of  a  State  Bank  so 
as  to  bring  in  some  elements  that  could  not  be  shown  in  a  State  Bank 
set  of  figures,  such  as  circulation,  government  bonds,  etc. 

A  bank  with  a  trust  department  would  have  to  make  a  further 
subdivision  of  expenses  and  this  is  shown  beginning  on  page  38. 

For  the  purpose,  therefore,  of  illustrating  a  method  of  cost  ac- 
counting, the  following  figures  are  used: 

The  Specimen  National  Bank*  not  in  a  reserve  city. 

Statement, 

ASSETS. 

Loans   and    discounts $3,122,500.00 

Due  from  reserve  banks 320,000.00 

Cash  and  due  from  other  banks 335,000.00 

Due  from  U.  S.  Treas 12,500.00 

Furniture  and  fixtures 20.000.00 

$3,810,000.00 
U.    S.    bonds 250,000.00 

$4,060,000.00 

LIABILITIES. 

•      Capital  $    250,000.00 

Surplus 50,000.00 

Undivided  profits 10,000.00 

Savings  deposits  2.000,000.00 

Certificates 350,000.00 

Commercial  deposits  1,150,000.00 

$3,810,000.00 
Circulation  250,000.00 

$4,060,000.00 

U.  S.  Bonds  and  circulation  are  added  after  totals  are  struck, 

as  these  two  items  offset  each  other  and  their  totals  do  not  enter  into 

cost  calculations. 

15 


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i  s 


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i 

V 


This  bank  pays  four  per  cent  on  savings,  compounded  semi- 
annually. 

Three  per  cent  on  six  months  certificates  and  four  j)er  cent  on 
one  year  certificates. 

Interest  is  paid  on  certain  checking  accoimts  by  special  agree- 
ment. 

For  the  purpose  of  this  explanation  all  the  figures  above  given 

are  supposed  to  represent  not  only  the  condition  on  a  certain  given 

date,  but  also  the  average  daily  amounts  for  each  item  for  a  period 

of  one  year. 

In  addition  to  the  figures  shown  in  statement,  the  follow^ing 

general  data  is  used  in  the  computation  of  costs  and  earnings. 

Average  daily  total  of  all  deposits $3,500,000.00 

Reserve  required    by    law.    15%     of  $3,500,000.00 
(minor  details  in  computation  of  reserve  omitted  as 

inconsequential  here)  525,000.00 

Average  daily  amount  of  assets  not  loaned 687.500.00 

Excess  of  fimds  not  loaned  over  legal  reserve 162.500.00 

Average  deuly  amount  in  transit 80,000.00 

Interest  Earnings, 

Total  interest  earned  by  all  loans $1  73.755.00(a) 

Interest  earned  by  balances  in  reserve  banks 4,000.00 

Interest  earned  by  government  bonds 5.000.00 

Exchange  and  sundry  earnings 3.000.00 

Total  of  all  earnings $l85,755.00(b) 

(a)  equals  5.56A6fr   on  funds  loaned. 

(b)  equals  5.3072%   on  total  deposits. 

For  accuracy  in  cost  accounting,  it  is  desirable  to  use  the  amount 
of  interest  actually  earned  in  a  year,  rather  than  the  interest  received. 

Exchange  earnings  are  included  with  the  interest  earnings  as  diey 
result  partly  from  the  maintenance  of  balances  in  other  cities,  and  the 
item  as  a  whole  is  too  small  to  warrant  any  individual  disposition  of  it. 

Division  of  Earnings  fcp  Departments. 

Savings  deposits   $2,000,000 

Commercial  deposits $1,150,000 

Certificates    350,000        1.500,000 

$3,500,000 

X  $185.755=$106.I45.71  for  savings  department. 


$2,000,000 
$3,500,000 

$1,500,000  ^  $155  755=^$  79,609.29  for  commercial  dept. 
$3,500,000 

16 


On  savings  accounts.... 

On  certificates 

On  checking  accounts... 


Interest  Paid  Out, 

Average  rates. 
.$70,000.00=3.5%o  net  on  sav.  deposits. 
.    12,250.00=3.5%  on  certificates. 

5.000.00=  .004347  average  on  commercial, 
(really  2%  in  special  cases) 


Detailed  Operating  Cost. 

The  plan  here  followed  is  to  charge  directly  to  each  depart- 
ment all  of  those  specific  expenses  having  to  do  with  the  clerical 
work  and  to  charge  in  general  expense  all  other  costs  aside  from  in- 
terest, and  then  to  assess  25%  of  the  general  or  overhead  expense 
against  the  two  departments  in  proportion  to  the  number  of  items 
handled  by  each  in  a  year,  the  remaining  75%  of  general  expense 
and  interest  on  capital,  surplus  and  profits  being  finally  assessed  to 
the  individual  accounts  on  the  basis  of  their  balances,  and  the  total 
clerical  cost  including  25%  of  overhead  expense  is  finally  assessed 
to  the  individual  accounts  in  proportion  to  the  number  of  items  in 
and  out  on  each  individual  account. 

This  plan  is  based  on  the  idea  that  the  mechanical  operation 
of  a  bank  has  two  main  elements  of  cost,  the  care  and  loaning  of 
money  and  the  handling  of  detailed  transactions  for  customers. 

That  the  detailed  cost  of  handling  items  should  be  assessed 
on  the  per-item  basis  is  manifest  and  that  some  share  of  the  over- 
head expense  should  be  included  in  the  calculation  of  the  cost  of 
handling  items  is  evident,  for  rent,  heat  and  light  are  quite  as  neces- 
sary to  the  clerical  force  working  on  items  as  to  the  officers  and 
directors  who  pass  on  loans.  A  certain  part  of  the  time  of  officers 
is  given  to  oversight  of  those  handling  items  and  even  to  personal 
attention  to  many  individual  items.  The  proportion  of  general  ex- 
pense (25%)  charged  into  the  per-item  cost  is  purely  arbitrary 
and  there  is  no  method  of  fixing  it  not  open  to  argument,  but  this 
proportion  has  been  approved  by  a  number  of  bankers  and  can  be 
altered,  of  course,  by  any  banker  who  may  see  fit  to  apply  a  differ- 
ent rate  in  his  own  cost  plans.  I  would  not  undertake  to  say  that 
either  20%  or  30%  would  be  wrong,  merely  contending  that  the 

17 


w)»>pi»i<iiiii^r<»'yyiw|it|i)iiipy|W'i'i<|iwyi'iiwiiwi«iiiiffl 


\il 


principle  of  including  some  per  cent  of  overhead  expense  is  in  line 
with  accepted  methods  of  cost  accounting  in  all  lines  of  business  and 
that  there  is  no  reason  for  not  including  it  in  the  case  of  a  bank. 

Subdivision  of  Operating  Expenses. 

Clerical  Expense 

Item.  Genl.  Expense     Commercial       Savings 

Rent    $  3.000.00 

Fuel  and  light 550.00 

Taxes    8,230.00 

Express  and  freight 400.00 

Postage   1 ,000.00 

General  stationery 850.00 

Pass    books,    checks    and    de- 

posit  slips   $       900.00     $    350.00 

Telegraph  and  telephone 275.00 

Salaries. 

Directors   1 ,000.00 

President  4,000.00 

Vice  president 3,000.00 

Cashier    2,500.00 

Asst.  cashier  and  rec.  teller...  1,600.00 

Savings  teller  and  bookkeeper  |  500  00 

General   bookkeeper   1.000.00  300.00  *200*00 

Commercial  bookkeeper 1,200.00 

Collection    clerk    720.00 

Paying  teller  1,200!00 

Stenographer   450.00  150.00 

General  clerks  600.00  500.00  100.00 

Porter   600.00 

Miscellaneous  expense  3,000.00 

Advertising   .-. 3,500.00 

Depreciation     on     fi  x  t  u  r  e  s 

(10%)     2,000.00 

Attorneys*   fees  1 .000.00 

Totals $36,505.00     $  6.870.00     $2,300.00 

25%   of  genl.  apportioned  to 

depts.  on  basis  of  items...     9,126.25         8,513.29  612.96 

Net   to   charge   on   basis 
of  balance  $27,378.75  *$15.383.29  *$2.912.96 

*Net  to  apportion  on  per-item  basis. 

In  the  above  statement,  a  number  of  items  such  as  postage,  ad- 
vertising and  general  expense,  have  been  thrown  entirely  into  the  general 
expense  colunin.  a  part  of  each  being  ultimately  distributed  to  the  various 
departments,  in  a  general  way.  It  is,  of  course,  possible  to  subdivide 
the  expenses  more  accurately  and  minutely,  between  the  different  depart- 
ments, but  this  is  a  matter  that  may  easily  be  carried  to  extremes. 

18 


This  bank  is  supposed  to  have  arrangements  with  its  reserve 
banks  for  crediting  all  items  at  par.  If  this  bank  were  obliged  to 
pay  specific  collection  charges,  these  would  properly  be  charged 
direct  to  the  cost  of  each  customer's  account  in  analyzing  the  same. 


Division  of  Net  General  Expense  Between  Departments 

On  Basis  of  Deposits. 


^^*^^nnn^  ^  $27.378.75=$! 5.645.00  or  total  general  expense  to 
$3,500,000  assess  to  Savings  Dept. 

$1,500,000  ^  $27.378.75=$1  1,733.75  or  total  general  expense  to 
$3.3UU,UUU        assess  to  Commercial  Dept..  including  Certificates. 

As  the  use  of  the  capital,  surplus  and  profits  of  the  bank  is  a 
cost  item  and  no  real  profit  can  exist  till  after  ordinary  interest  is 
earned  on  same,  and  as  all  the  interest  earnings  of  the  bank  have 
been  averaged  against  deposits  onl}f  to  show  the  average  earning 
rate  for  deposits  we  must  add  to  the  general  operating  expense  an 
amount  equal  to  six  per  cent  on  capital,  surplus  and  profits  (6% 
of  $310,000.00  or  $18,600.00),  to  get  the  true  total  cost  of  doing 
business. 

75%  of  general  expense $27,378.75 

6%  of  capital,  surplus  and  profits 1 8,600.00 

Total  general  cost  of  operation $45,978.75 

J.O  g  r,f\  r\/\r\  nnT^  ^  '^  ^  367%  or  average  cost  of  each  dollar  of  deposits 
$3,500,000.00 

for  general  expense  and  to  cover  use  of  capital,  surplus  and  profits. 


19 


I 


. 


\  i 


General  Statement  of  Earnings  fcp  Departments,  treating  Certificates 
as  a  part  of  the  Commercial  Department, 


COMMERCIAL  DEPARTMENT. 

Total   interest  earnings $79,609.29 

Interest  on  checking  accounts $   5,000.00 

Interest  on  certificates 12,250.00 

Proportion  of  general  expense....    11,733.75 

Detailed  operating  expense 15,383.29        44,367.04 

Net  earnings  $35,242.25 

SAVINGS  DEPARTMENT. 

Total  interest  earnings  $106,145.71 

Interest  paid  out  $70,000.00 

Proportion        of 

genl.    expense   1 5,645.00 

Detailed  operat- 
ing expense....     2,912.96         88.557.96 

Net  earnings  $    1  7,587.75  1  7,587.75 

Total  net  earnings  of  bank $52,830.00 

6%  on  capital,  surplus  and  profits 18.600.00 

Actual  net  profits $34,230.00 

Net  earnings  equal  17.4%  on  capital,  surplus  and  profits,  or  21.13% 

on  capital  only. 
Net  profits  equal  11.4%  on  capital,  surplus  and  profits,  or   13.69% 

on  capital  only. 

It  is  interesting  to  note  that  although  the  Savings  Department 
has  one-third  more  deposits  than  the  commercial  department  its 
actual  net  earnings  are  less  than  one-half  as  much,  with  an  interest 
rate  of  four  per  cent  on  savings. 

Were  the  use  of  capital,  surplus  and  profits  assessed  against 
each  department  in  proportion  to  the  deposits  in  each,  instead  of 
against  the  total  net  earnings,  as  here  shown,  the  savings  depart- 
taent  would  show  a  still  less  favorable  relative  profit. 

However,  as  a  comparison  between  strictly  savings  and  regu- 
lar commercial  business,  it  is  only  fair  to  add  that  losses  would  be 
very  small  in  a  strictly  savings  bank,  while  some  loss,  and  often  con- 
siderable loss,  is  unavoidable  in  commercial  banking. 

20 


1! 


A 


'! 


Computation  of  total  number  of  items  in  and  out  handled  in  each 

department  in  a  y^ear  and  the  fixing  of  an  average 

per-item  cost  in  each  department. 


COMMERCIAL  DEPARTMENT. 

Number  of  cash  deposits 67,000 

Number  of  checks  and  drafts  on  other  cities 175,000 

Number  checks  on  other  banks  in  city 133,000 

Number  of  certificates  written  and  cashed 2,500 

Number  of  post-office  orders 12.500 

Number  of  checks  drawn  on  this  bank .235.000 

Total  items  handled  in  conmiercial  dept.  in  year 625,000 

SAVINGS  DEPARTMENT. 

Number  of  cash  deposits 21,000 

Number  of  checks  and  drafts  on  other  cities 2,600 

Number  checks  on  other  banks  this  city 500 

Number  of  post-office  orders 1,900 

Number  of  withdrawal  checks 19,000 

Total  items  handled  in  savings  dept  in  year 45,000 

(For  practical  purposes  a  count  of  the  total  items  for  an  average 
month,  multiplied  by  twelve,  would  be  sufficiently  accurate.  See  re- 
marks on  **Counting  Items."  pages  51  and  52.) 


Total   cost    of    handling    items    conunercial    dept..    $15,383.29^       ^^ 

Number  of  items.     625,000 
$.02461 3  cost  per  item  in  commercial  department. 


Total   cost  handling  items   in   savings   dept..   $2.912.96  , 

Number  of  items.     45,000 
$.06473  cost  per  item  in  savings  department. 


Having  now  established  an  average  earning  rate  for  each  dol- 
lar of  deposits,  an  average  percentage  to  allow  for  general  expense 
and  to  cover  use  of  capital,  surplus  and  profits,  and  having  estab- 
lished a  per-item  cost  in  both  commercial  and  savings  departments, 
and  knowing  the  rate  of  interest  paid  on  savings  accounts  and 
certificates,  and  the  specific  interest  credited  to  certain  checking 
accounts;  we  have  basic  percentages  from  which  the  earnings  and 
cost  of  any  savings  or  commercial  account  or  certificate  can  be 

21 


j^^^gfgBipwM^^pp^^ 


|i|^|pjt»ij|lffl.Wll'TOiffl>l|l| 


J     t 


quickly  and  easily  computed.  As  these  elements  cover  all  items  of 
cost,  were  we  to  analyze  every  account  in  the  bank  and  compile  the 
profit  or  loss  on  each  we  would  get  a  total  corresponding  to  the 
total  net  profit  as  shown  by  the  general  books,  this  being  the  princi- 
pal test  for  proving  the  correctness  of  a  cost  system. 


Specimen  Analysis  of  a  Commercial  Account  Having  an  Average 

Bail})  Balance  of  $2,000.00  and  a  Total  of  1 .000 

Items  in  and  out  in  a  Year. 

5.3072%  (average  earning  rate  on  deposits) 

times  $2,000.00.  equals  total  earnings  of $106.14 

1.31367%  (average  cost  on  basis  of  balance) 

times  $2,000.00,   equals $26.27 

1000  items  at  $.024613.   equal 24.61--     50.88 

Net  annual  profit  on  account $  55.26 

which  equals  .02763%  on  average  balance. 
No  interest  paid  on  this  account. 


Specimen  Analy^sis  of  a  Commercial  Account  Which  Barely  Pays 

Its  Cost,    Average  Daily  Balance,  $300.00.     Total 

Number  of  Items  in  and  out  in  a  Year,  486. 

5.3072%   (average  earning  rate  on  deposits) 

times  $300.00  equals  total  earnings  of $15.92 

1.31367%   (average  cost  on  basis  of  balance) 

times  $300.00  equals $  3.94 

486  items  at  $.024613  equal 11.98        15.92 

Account  just  breaks  even $00.00 

From  tfie  above  it  will  be  clear  that  no  fixed  balance  can  be  set 
as  representing  the  line  between  profit  and  loss,  as  the  number  of  items  is 
fully  as  vital  a  feature  as  is  the  balance.  An  account  with  an  average 
balance  of  $100.00  would  break  even,  provided  the  number  of  items 
did  not  exceed  1 62  in  a  year. 

22 


Specimen  Analysis  of  a  Savings  Account  Having  an  Average 
Balance  of  $500.00  and  12  Items  in  and  out  in  a  Year, 


5.3072%  (average  earning  rate  on  deposits) 

times  $500.00  equals  total  earnings  of $  26.54 

3.5%   (average  rate  of  interest  paid  on  savings) 

times    $500.00.    equals $17.50 

1.31367%  (average  cost  on  basis  of  balance) 

times  $500.00,  equals 6.57 

12  items  at  $.06473,  equal .78         24.85 

Net  annual  profit  on   account $    1.69 

which  equals  .00338%  on  average  balance. 


It  will  be  well,  at  this  point,  to  bear  carefully  in  mind  the  fact 
that  while  commercial  accounts  are  analyzed  for  the  purpose  of 
adjusting  individual  accounts;  savings  accounts  are  analyzed  for  the 
purpose  of  determining  whether  the  rate  paid  and  the  rules  and  con- 
ditions, as  a  whole,  are  such  as  to  show  a  proper  profit  to  the  bank 
on  all  classes  of  accounts,  and  if  not.  to  so  modify  those  general  con- 
ditions, as  to  all  customers,  as  to  put  the  savings  department  on  a 
sound  basis. 

It  will  be  noted  that  in  the  account  analyzed  above,  we  have 
used  the  average  rate  paid  on  savings,  instead  of  the  actual  interest 
paid  on  this  particular  account.  This  form  of  analysis  is  of  interest 
as  showing  average  results,  and  it  is  the  only  form  of  analysis  that 
could  be  used  for  estimating  the  probable  future  profit  of  an  account, 
inasmuch  as  it  cannot  be  told  in  advance  whether  the  depositor  will 
so  deposit  and  withdraw  as  to  forfeit  part  or  all  of  his  interest,  or  so 
as  to  obtain  the  full  rate  of  four  per  cent. 

We  would,  however,  fall  far  short  of  obtaining  all  the  informa- 
tion we  should  have  if  we  failed  to  consider  what  various  classes  of 
individual  accounts  may  earn  and  do  earn  under  the  varying  con- 
ditions which  depositors,  under  the  rules,  create  for  themselves. 

The  following  figures  will  be  valuable  for  a  further  considera- 
tion of  the  matter.     TTiese  figures  of  course  aipply  to  the  Specimen 

National  Bank- 

23 


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iVi 


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I 


Average  earning  rate  on  deposits 5.3072     % 

Average  cost  rate  on  basis  of  balance ..1.31367  % 

Average  net  earning  rate  of  deposits  on  basis  of  balance 3.99353  % 

Average  rate  to  cover  cost  of  handling  items  in  savings  depart- 
ment ($2.9 1 2.96-^$2.000.000=.00 1 456% ) .001456% 

Average  net  earning  rate  of  all  savings  balances 3.992074% 

Averate  rate  of  interest  paid  on  all  savings  deposits .3.5 % 

Average  net  margin  of  profit  on  all  savings  deposits 492074% 

However,  this  last  figure  is  the  average  rate  of  profit,  based  on 
the  average  rate  paid  OYiVc)  and  with  the  item  cost  averaged  on 
the  basis  of  balance. 

Individual  accounts  may  show  wide  variations  from  this  result. 

A  depositor  who  so  deposited  and  withdrew  as  to  forfeit  all 
interest  would  produce  a  profit  3 J/2%  greater. 

And  a  depositor  who  maintained  a  permanent,  undisturbed 
balance  would  receive  the  full  four  per  cent.,  whereas  his  account, 
ii  charged  with  its  full  share  of  expense,  would  earn,  net,  but 
3.99353%. 

While  the  rate  that  any  individual  bank  can  afford  to  pay  on 
savings  is  determined  largely  by  its  own  average  loaning  rate  and 
by  its  volume  of  business  and  cost  rate  for  handling  money,  and 
while  the  rate  which  it  must  pay  may  be  determined,  to  some  extent, 
by  competition,  nevertheless  certain  valuable  deductions  can  be 
drawn  from  the  above  figures,  as  to  the  Specimen  National  Bank 
or  any  other  bank  operating  under  similar  conditions,  and  many  of 
these  deductions  will  apply  in  a  relative  way  to  any  bank. 

These  conclusions  are ; 

TTiat  the  average  hank  can  pay  four  per  cent,  on  savings  and 
make  a  profit  on  the  business  as  a  rvhole,  but  that  this  profit  is  not 
commensurate  with  the  profit  on  commercial  business  carried  on 
under  the  same  general  conditions,  nor  consistent  with  the  capital 
and  ability  required.  This  will  be  clear  if  we  take  the  net  earnings 
of  the  savings  department  in  the  Specimen  National,  $17,587.75, 

24 


t 


and  deduct  interest  on  that  portion  of  the  capital,  surplus  and  profits 
which  would  be  properly  assessed  to  the  savings  department,  viz: 
$10,628.57,  as  this  would  leave  an  actual,  net,  annual  profit  of  but 
$6,959.18  (in  excess  of  6%  on  capital,  surplus  and  profits),  on  a 
savings  business  aggregating  two  millions.  This  sum  is  manifestly 
inadequate  to  the  creation  of  a  proper  surplus,  meeting  possible 
losses  and  producing  any  clear  profit  for  the  stockholders. 

That  permanent  accounts  in  such  a  bank  produce  a  small  but 
continuous  loss. 

That  the  profit  made  on  the  business  as  a  whole,  comes  entirely 
from  the  factor  of  the  forfeiture  of  interest  by  a  part  of  the  depositors. 

That  in  such  a  bank,  the  granting  of  rules  or  special  concessions 
that  tend  to  reduce  or  eliminate  the  forfeiture  of  interest,  will  operate 
to  bring  the  whole  business  nearer  and  nearer  to  the  point  where  it 
will  not  pay. 

That  the  average  cost  of  handling  items  in  the  savings  depart- 
ment is  high  and  if  a  depositor  is  permitted  to  use  his  savings  account 
as  a  checking  account,  all  possible  profit  will  be  destroyed,  particu- 
larly if  the  rules  as  to  withdrawals  result  in  his  receiving  interest  on 
his  balance. 

That  in  any  savings  bank  the  most  profitable  accounts  are  the 
large  ones  which  are  just  sufficiently  active  to  develop  strongly  the 
factor  of  forfeited  interest. 

That  small  accounts  are  of  value  only  for  the  future  there  may 
be  in  part  of  them  and  for  the  friendly  influence  of  their  owners. 

The  percentage  of  loss  on  permanent  accounts  here  shorvn 
(.00647%)  is  very  small  and  the  elimination  of  such  accounts  would 
he  undesirable,  as  the})  are  carrying  an  amount  of  general  expense 
(1.31 367%  )  which  is  far  greater  than  the  net  loss  they  cause,  and  if 
they  were  eliminated,  this  amount  of  expense  would  revert  to  the 
remaining  business. 

There  can  be  no  question  but  that,  in  the  average  bank,  a  rate 
lower  than  four  per  cent.,  with  more  equitable  rules,  so  planned  ais 

25 


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I'S 


to  produce  only  a  nominal  forfeiture  of  interest,  would  be  fairer  to 
customers  as  a  whole,  and  help  the  bank  by  producing  a  more  evenly 
balanced  profit  on  all  classes  of  accounts  and  a  greater  total  profit. 

Certificates,  likewise,  are  analyzed,  not  for  the  purpose  of 
changing  the  conditions  of  any  particular  certificate,  but  to  determine 
whether  the  rates  paid  and  the  terms  granted  on  all  certificates  are 
equitable  and  profitable. 

In  analyzing  a  certificate,  the  rate  actually  paid  on  that  partic- 
ular certificate  should  be  used.  The  securing  of  the  average  rate 
paid  on  all  certificates,  when  they  are  issued  at  more  than  one  rate, 
is  simply  for  comparative  purposes. 

In  the  Specimen  National,  three  per  cent,  certificates  would 
show  a  profit,  while  four  per  cent,  certificates  would  be  in  the  same 
class  with  permanent  savings  accounts  and  would  show  a  small  loss. 

In  analyzing  certificates,  two  items  should  be  figured  in  the  cost, 
covering  the  writing  and  the  cashing  of  the  certificate. 


The  results  above  shown  are  those  that  would  be  accomplished 
in  a  bank  having  Ae  same  conditions  in  every  way  as  our  Specimen 
National  Bank-  These  results  would  naturally  vary  in  different 
banks,  according  to  their  expenses,  the  rate  paid  on  savings,  and  the 
rate  earned  on  funds  loaned,  etc. 

This  completes  the  system  for  a  bank  in  a  city  not  a  reserve  city, 
and  in  which  there  are  no  accounts  having  an  abnormal  quantity  of 
out-of-towns  items  deposited. 

It  consists  briefly  of  a  logical  method  of  distributing  the  earn- 
ings and  costs  of  the  bank  to  the  individual  accounts  by  means  of 
certain  basic  averages.  Different  men  will  have  somewhat  different 
ideas  as  to  the  distribution  of  certain  expense  items,  whether  cer- 
tain items  shall  be  charged  on  a  balance  basis  or  a  per-item  basis, 
and  the  division  of  clerical  salaries  between  the  different  depart- 
ments naturally  would  be  laid  out  according  to  the  work  done  by 
various  employees  in  each  bank, — but  this  system  apportions  ever^ 
dollar  of  expense  to  customer's  accounts,  and  this  is  the  important 

26 


point.  Whether  some  certain  expense  is  included  in  the  balance 
cost  or  in  the  per-item  cost  would  at  most  make  very  little  difference 
in  the  cost  of  any  individual  account  and  no  difference  at  all  on  the 
aggregate  cost  of  all  accounts. 


Some  bankers  assess  all  costs  on  the  basis  of  balance,  contending 
that  obtaining  and  applying  a  per-item  cost  involves  too  much  work. 
They  treat  the  handling  of  items  as  an  incidental  matter  of  small  cost 
and  not  worthy  of  separate  accounting.  A  careful  consideration  of  the 
above  analysis,  however,  shows  that  the  per-item  cost  in  an  average 

bank  really  is  a  considerable  portion  of  the  operating  cost,  and  no  truly 
correct  analysis  of  accounts  in  the  average  bank  can  be  made  without 
figuring  a  proper  p)ortion  of  cost  on  die  per-item  basis.  If  all  costs  are 
assessed  on  a  balance  basis  an  undisturbed  balance  of  $100  would 
show  exactly  the  same  cost  as  an  account  having  an  average  balance  of 
$100  and  any  number  of  items  in  and  out — a  manifest  inconsistency. 
The  very  purpose  of  an  analysis  is  to  show  whether  the  balance  is  in 
proportion  to  the  cost  of  handling  the  account  and  this  purpose  is  de- 
feated by  throwing  the  item  cost  in  with  the  balance  cost  Tlie  total 
number  of  items  handled  by  the  bank  can  usually  be  easily  told  from 
present  records  and  the  number  of  items  per  account  would  not  be  com- 
piled all  the  time  for  all  accounts,  but  simply  for  a  period  of  one  month 
on  such  accounts  as  were  analyzed.     (See  page  51.) 


So  far  in  this  discussion  there  has  been  no  attempt  to  figure  the 
cost  of  collections*  individually,  the  cost  being  covered  as  an  average 
and  going  to  reduce  the  average  earning  of  deposits.  The  specific 
costs  of  collection  by  banks  not  in  central  reserve  cities  are  almost 
entirely  passed  on  to  their  correspondent  banks  in  the  central  re- 
serve cities  and  paid  for  indirectly  by  leaving  low-interest-earning 
balances  in  those  banks.  As  the  total  amount  of  interest  earned 
has  been  used  in  figuring  the  percentage  earned  by  deposits  it  fol- 
lows that  the  rate  thus  established  automatically  takes  care  of  the 
cost  of  collection,  as  it  allows  for  all  idle  funds,  and  for  reserve 
funds  earning  a  low  rate  of  interest. 

*In  this  book  the  word  "Collections**  is  used  in  the  broad  sense, 
meaning  all  out-of-town  items. 

27 


?;^^«X»a.:, 


But  it  is  particularly  noted  that  this  feature  of  the  cost  of  col- 
lection is  thus  made  a  uniform  or  average  charge  against  accounts 
on  the  basis  of  their  balances,  and  while  it  would  be  so  nearly  equit- 
able in  a  bank  where  the  checking  accounts  each  have  about  the  same 
relative  amount  of  foreign  items  in  proportion  to  local  items,  that  it 
would  not  be  policy  to  enter  into  elaborate  calculations  on  this  mat- 
ter, still  in  a  bank  having  some  customers  whose  collection  work  is 
abnormal,  or  in  a  reserve  city  bank,  this  feature  must  be  handled 
differently. 

However,  in  the  average,  moderate-sized  bank,  the  system  of 
averages  outlined  above  is  entirely  accurate  as  to  general  results  and 
it  is  most  easily  applied  to  the  average  run  of  accounts  even  though 
the  alternate  system  that  follows  be  applied  to  exceptional  accounts. 
Technically  speaking,  it  does  not  properly  discriminate  between  the 
customer  who  deposits  local  items  and  the  one  who  deposits  foreign 
items,  charging  each  with  a  uniform  cost  rate,  but  the  inequity  in 
moderate-sized  accounts  would  be  very  small  and  not  sufficient 
to  warrant  the  application  to  them  of  the  more  elaborate  system 
required  in  the  analysis  of  very  large  commercial  accounts  with 
abnormal  collection  features,  the  accounts  of  other  banks,  or  in 
the  cost  accounting  of  a  reserve  city  bank. 

We  will  now  consider  those  further  methods  necessary  to 
properly  handle  these  more  complex  conditions. 

In  the  first  place  the  figuring  of  costs  will  be  unchanged  from 
the  method  shown  above,  except  that  in  a  central  reserve  bank,  spe- 
cific collection  charges  will  be  charged  to  the  cost  of  the  individual 
account,  and  the  percentage  to  cover  cost  assessed  on  a  balance  basis 
will  be  calculated  in  a  little  different  manner. 

The  necessary  differences  in  method  of  computation,  with  these 
exceptions,  come  in  the  figuring  of  earnings. 

The  explanation  of  how  to  handle  an  occasional  abnormal 
account  in  the  Specimen  National,  will  be  clearer  if  we  first  take  up 
the  computation  as  it  would  be  made  for  accounts  carried  in  Central 
Reserve  City  Banks. 

28 


In  a  Central  Reserve  City  Bank. 

Operating  expenses  would  be  distributed  in  the  same  manner 
as  already  outlined,  viz. :  on  the  basis  of  balance  cost  and  a  per- 
item  cost.  But  specific  collection  costs  will  be  charged  direct  to  the 
cost  of  each  account. 

Earnings  would  be  figured  by  first  deducting  from  the  apparent 
balance,  the  average  daily  amount  in  transit,  by  a  method  of  figur- 
ing given  in  detail  as  a  foot  note  on  page  5 1 . 

From  this  true  balance  would  be  deducted  the  legal  reserve 
of  25%  to  give  the  net  actual  usable  balance. 

The  reason  for  deducting  the  reserve  in  detail  instead  of  aver- 
aging this  shrinkage  into  the  earning  rate  on  the  balance,  is  that  in 
a  central  reserve  bank  the  reserve  is  large  and  it  is  an  item  of  cost 
that  will  not  be  questioned  by  customers  to  whom  an  analysis  of 
their  accounts  may  be  submitted,  whereas  were  it  averaged  into  the 
earning  rate  they  might  question  that  rate,  not  knowing  how  it  was 

obtained. 

It  will  be  clear,  however,  that  even  after  deducting  the  average 
amount  in  transit  and  the  25%  legal  reserve,  from  the  total  apparent 
deposits,  the  remaining  actual  balance,  while  "usable."  is  not 
actually  all  used,  as  a  central  reserve  city  bank  must  keep  some 
money,  at  least,  on  deposit  with  other  banks,  and  some  of  its  cash 
funds  are  not  legal  for  reserve. 

Hence  they  cannot,  with  fairness  to  themselves,  credit  the  cus- 
tomer with  the  average  loaning  rate  on  his  actual  usable  balance, 
nor  can  the  customer  expect  this,  as  the  25%  legal  reserve  is  a  min- 
imum, not  a  practical  line  of  division  between  idle  and  working 

funds. 

Hence  they  must  establish  an  earning  rate  for  actual  usable 

balances  and  this  would  be  figured  in  this  way :  Average  daily  total 

deposits  as  per  books,  less  total  average  amount  in  transit  daily,  less 

25%  for  legal  reserve,  divided  into  total  interest  earnings  for  year, 

equals  average  rate  of  earnings  on  actual  usable  balances. 

29 


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■J!aa|i(^|!S<^|^prt««»«i>«*i^«»f«WSM«WMSB»W  ■ 


'.«»>(-*i'*»j«il»*t.S«»»* 


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f. 


« 


The  percentage  to  cover  the  general  cost  of  doing  business 
should  also  be  computed  on  and  assessed  to  the  individual  accounts 
on  the  same  basis,  that  is,  on  the  basis  of  usable  balances. 

An  analysis  of  an  account  in  a  central  reserve  city  bank, 
handled  on  the  basis  of  crediting  all  items  at  par  on  day  received, 
and  paying  2%  interest  on  true  balance,  that  is  the  balance  after 
deducting  items  in  transit  only;  would  appear  as  follows: 

Apparent  average  daily  balance $100,000.00 

Less  average  daily  amount  in  transit 10,000.00 

True  total  average  balance $  90,000.00 

Less  25%   for  legal  reserve 22.500.00 

Actual  usable  balance $  67,500.00 

4. 75%    (average  rate  earned  on  actual  usable  balances) 

times  $67,500.00,  equals  $      3,206.25 

.75%   (percentage  for  balance  cost) 

times  $67,500.00,  equals $    506.25 

25,000  items  at  $.015,  equal 375.00 

Specific   collection   charges 125.00 

Interest  on  $90,000.00  at  2% 1.800.00  2.806.25 

Net  annual  profit  on  account $         400.00 

which  equals  .004%  on  apparent  average  balance. 

The  earning  and  cost  percentages  and  per-item  cost  here  given  for 
a  central  reserve  city  bank  are  purely  imaginary  and  inserted  to  illus- 
trate the  method. 

Notice  Carefully, 

Some  bankers  in  ordinary  reserve  cities  and  in  central  reserve  cities, 
while  admitting  the  necessity  and  practicability  of  a  per-item  cost  in  the 
average  run  of  banks,  contend  that  in  large  reserve  banks,  this  feature 
would  entail  a  prohibitive  amount  of  work  and  that  it  is  not  necessary 
for  several  reasons.  First,  because  in  a  very  large  bank  the  salaries  of 
executive  officers  amount  to  so  much  larger  relative  proportion  of  the 
whole  salary  list  and  that  clerical  expense  as  a  whole  is  such  a  relatively^ 
small  part  of  their  total  operating  expense,  that  its  separate  accoimting 
is  not  worth  while,  and  that  it  is  approximately  correct  and  better  prac- 
tice to  assess  all  costs,  except  as  shown  above,  on  the  basis  of  the  bal- 
ance. The  fact  that  the  central  reserve  bank  deducts  time  in  transit 
and  collection  charges  specifically,  and  inasmuch  as  their  business  with 
other  bankers  probably  follows  more  nearly  an  average  condition  as  to 
the  ratio  between  balance  and  per-item  cost,  doubtless  justifies  their 

30 


~( 


Li  A 


opinion,  though  I  believe  their  conclusion  is  based  on  sound  appearing 
theory  rather  than  on  the  basis  of  actual  figures  made  in  both  ways.  This 
is  one  of  those  fine  points  that  die  individual  banker  must  settle  for 
himself.     (See  additional  remarks  on  this  subject  on  page  51.) 

The  foot  note  explaining  the  method  of  computing  the  average 
daily  amount  in  transit  completes  the  explanation  as  to  a  central 
reserve  city  bank.     (Page  51.) 


In  an  Ordinary  Reserve  City  Bank. 

This  method  with  some  manifest  modifications  as  to  the  matter 
of  reserve  would  also  apply  to  a  bank  in  a  reserve  city  but  not  in  a 
central  reserve  city. 

As  banks  in  ordinary  reserve  cities  collect  some  items  direct 
and  some  through  their  central  reserve  city  connections,  it  follows 
that  the  calculation  of  a  customer's  actual  average  amount  in  transit 
is  difficult.  In  one  city  a  clearing  house  rule  fixes  a  certain  average 
time  in  transit  which  average  is  used  arbitrarily,  but  as  it  is  based 
largely  on  the  time  in  transit  to  central  reserve  points  merel}?  and 
does  not  include  the  additional  time  in  transit  absorbed  by  the  cen- 
tral reserve  city  banks  and  paid  for  by  means  of  low-interest-bear- 
ing balances,  there  is  a  manifest  inequity  against  the  banks  in  an 
ordinary  reserve  city  and  in  favor  of  their  customers,  I  believe  that 
the  bank  in  an  ordinary  reserve  city  should  figure  its  accounts  in 
much  the  same  manner  as  is  given  herein  for  the  use  of  the  Specimen 
National  in  analyzing  special  accounts,  computing  time  in  transit  on 
the  basis  of  direct  collection. 

As  the  amount  of  funds  in  transit  varies  greatly  in  different  ac- 
counts, and  as  it  is  such  a  large  factor  in  cost,  the  use  of  an  average, 
even  if  it  were  a  correct  average,  would  manifestly  be  extremely  in- 
equitable as  to  individual  large  accounts  in  banks  in  reserve  or  central 
reserve  cities. 

In  making  analyses  of  individual  accounts,  the  bank  in  an  ordi- 
nary reserve  city,  will  doubtless  desire  to  deduct  the  reserve  spe- 
cifically, as  does  the  bank  in  a  central  reserve  city,  inasmuch  as  this 

31 


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)] 


is  a  large  and  indisputable  item  of  cost,  but  if  this  plan  is  followed 
then  the  interest  earned  by  a  part  of  their  reserve  must  be  included 
in  total  interest  earnings  when  computing  the  average  earning  rate  of 
usable  balances. 

This  plan  of  deducting  reserve  specifically,  in  an  ordinary  re- 
serve city  bank,  however  desirable  in  practice,  has  a  certain  element 
of  inaccuracy,  inasmuch  as  a  part  of  such  a  bank's  in-transit  items 
can  be  counted  as  reserve.  Consequently,  if  the  individual  customer 
is  charged  with  his  total  in-transit  and  with  the  full  reserve,  he  is  be- 
ing given  no  credit  for  the  fact  that  some  portion  of  his  in-transit 
items  is  countable  as  reserve.  And  it  would  be  impractical  to  de- 
termine the  amount  of  this.  However,  this  discrepancy  is  in  favor 
of  the  bank  and  may  perhaps  be  looked  upon  as  only  a  proper  mar- 
gin of  safety. 

Method  for  Analyzing  Special  Accounts  in 
The  Specimen  National  Bank. 

Now  if  the  Specimen  National  wishes  to  figure  the  account  of 
any  individual  customer  so  as  to  calculate  the  actual  cost  of  collec- 
tions on  that  account,  it  can  adopt  the  central  reserve  bank's  method 
as  to  any  one  or  more  accounts,  without  affecting  the  correctness 
of  the  general  method  as  to  the  ordinary  run  of  accounts,  but  as  to 
these  accounts,  figured  approximately  by  the  reserve  city  bank's 
tnethod,  certain  points  must  be  carefully  borne  in  mind. 

A  new  average  earning  rate  must  be  obtained  and  this  rate 
must  be  calculated  in  much  the  same  manner  as  the  central  bank's 
rate. 

And  here  arises  a  point  that  is  likely  to  cause  confusion.  Our 
figures  show  that  the  Specimen  National  has  a  daily  average  of 
$80,000  in  transit,  but  this  does  not  give  a  correct  basis  to  work 
from  if  we  are  to  deduct  from  the  customer's  balance  the  entire  true 
amount  of  his  balance  in  transit.  In  other  words  we  must  figure  our 
general  percentages  on  the  same  basis  that  we  are  going  to  figure  his 
account. 

32 


I 


■"i 


Assuming  that  if  the  Specimen  National  itself  performed  the 
duties  it  pays  its  reserve  bank  to  do  for  it,  and  collected  direct,  and 
that  then  its  average  time  in  transit  would  be  3J/^  days,  under  these 
conditions  the  Specimen  National's  total  in  transit  would  be  3|/2 
times  $80,000.00  or  $280,000.00,  and  its  earning  rate  on  actual 
balances  would  then  be  figured  thus : 

Total   deposits  $3,500,000.00 

Less  amount  in  transit 280.000.00 

Total  of  net  actual  balances $3,220,000.00 

Interest  earnings.     $185755.00 _.  -,Q-^,  ,       , 

$3,220,000.00~^*^^,^7'  T  '"™^f«  7^*^  ^^  "^ 

dollai  or  actual  balance. 

This  rate  allows  for  that  portion  of  reserve  not  covered  by  all 
or  some  part  of  amount  in  transit,  it  allows  for  interest  earnings  on  a 
part  of  reserve  and  is  the  true  net  earning  rate  on  all  deposits  after 
deducting  the  amount  in  transit,  as  it  would  he  if  all  items  were  col- 
lected direct. 

Except  in  a  central  reserve  city  bank  it  is  not  equitable  to  de- 
duct reserve  specifically  from  each  account  inasmuch  as,  in  the  case 
of  a  bank  not  in  a  central  reserve  city,  items  in  transit  to  approved 
reserve  agents  are  counted  as  a  part  of  reserve. 

Another  reason  is  that  the  Central  Bank's  reserve  earns  noth- 
ing and  hence  it  is  proper  to  deduct  it  entirely  from  the  customer's 
account  before  figuring  the  earning  poiver  of  that  account,  but  the 
other  banks  receive  interest  on  part  of  their  reserve,  therefore  in 
such  banks  the  only  fair  way  is  to  include  reserve  earnings  as  a  part 
of  interest  earnings  and  to  average  total  earnings  against  total  de- 
posits, thereby  including  in  the  resulting  rate  a  due  allowance  both 
for  the  interest  loss  and  the  interest  gain  by  reason  of  reserve  re- 
quirements. 

We  must  now  also  establish  a  new  percentage  for  balance  cost, 
as  earnings  and  cost  must  both  be  figured  on  the  same  basis,  thus: 

Total  balance  cost,  $45,978.75         ^^^„ 

Total  actual  balances.  $3,220,000.00  ^'•"^^^^^^   °'  *^"'^«'  ^"^'^'' 

cost  of  each  dollar  of  actual  balance. 

33 


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A  specimen  account  would  then  be  figured  in  this  way: 

Apparent  average  daily  balance...^ $50,000.00 

^Average  daily  amount  in  transit  (basis  of  direct  collection)     1 0.000.00 

Actual  balance  $40.000.00 

5.7687%   (earning  rate  on  actual  balances) 

times  $40,000.00  equals  total  earnings  of $  2.307.48 

1.4278'/,    (balance  cost  on  actual  balances) 

times  $40,000.00  equals $571.12 

25.000  items  at  $.024613 615.33 

Interest  at  2%  on  $40,000.00  equals 800.00 

Estimated  specific  collection  charges 100.00  2,086.45 

Net  annual  profit  on  account $       221.03 

The  figuring  of  actual  collection  costs  is  more  difficult  in  a 
bank  not  in  a  central  reserve  city  than  it  is  for  the  central  bank,  at 
least  the  establishing  of  the  proper  percentages  seems  more  complex. 
The  difficulty  arises  from  the  fact  that  the  time  in  transit  is  largely 
absorbed  by  the  central  bank,  and  its  compensation  being  in  the 
form  of  a  semi-idle  balance,  the  problem  of  distributing  this  cost  to 
the  customers  of  the  out-of-town  bank  is  a  hard  one  at  first  glance, 
but  it  is  believed  that  the  method  outlined  above  arrives  at  results 
that  are  as  near  absolute  cost  as  can  be  hoped  for. 

Nearly  every  bank  has  a  few  accounts  depositing  an  abnormal 
number  of  out-of-town  items,  and  they  are  often  losing  accounts. 
Their  balances  look  good  on  the  face  of  the  books,  but  on  a  true 
analysis  a  positive  loss  is  shown.  What  difficulty  there  may  be  in 
correctly  analyzing  such  accounts  will  well  repay  the  effort  if  suit- 
able balances  are  secured.  Every  account  that  causes  a  loss  uses 
up  the  earnings  on  that  much  profitable  business. 

It  might  be  thought  that  as  the  Specimen  National  gets  credit 
on  the  next  day  for  all  items  sent  to  its  reserve  bank,  that  its  customer 
w4io  deposits  any  quantity  of  outside  items  is  entitled  to  have  the 
earnings  (not  the  interest  paid  to  him)  of  his  balance  figured  from 
that  day,  but  this  overlooks  the  semi-idle  balance  which  the  Speci- 
men National  is  carrying  with  its  reserve  bank  as  compensation  for 
such  service,  and  as  the  reserve  bank  determines  the  amount  of  that 
*See  Fool  Note  on  page  5 1  for  method  of  computation. 

34 


balance  by  figuring  the  time  in  transit  of  outside  items,  there  is 
only  one  proper  way  and  that  is  to  figure  the  full  time  for  direct 
collection  against  the  customer  and  to  adjust  the  other  percentages 
so  as  to  be  consistent  with  this  method. 

It  is  sometimes  stated  that  it  is  not  fair  to  charge  to  the  cus- 
tomer the  loss  of  interest  on  funds  in  reserve  banks,  because  the  law 
requires  a  reserve,  but  as  a  matter  of  fact  were  there  no  such  law, 
most  banks  would  have  to  keep  about  this  amount  of  reserve  in 
order  to  properly  handle  their  business,  but  even  were  the  reserve 
of  no  use  except  to  satisfy  the  law,  its  cost,  being  unavoidable,  is 
properly  charged  to  the  customer. 

In  fact,  all  costs  in  an  efficiently  conducted  business  of  any 
kind  are  properly  passed  on  to  the  customer.  Only  costs  arising 
from  poor  management  or  defective  facilities  should  be  absorbed  by 
the  institution  itself. 

The  item  of  losses  has  not  been  considered  in  this  system  of 
cost  accounting  as  losses  in  the  banking  business  are  so  variable  that 
no  fixed  percentage  could  be  allowed  for  them.  It  is  manifest  that 
an  amount  of  profit  must  be  sought  which  will  be  sufficient  to  provide 
for  moderate  losses,  and  immoderate  losses  cannot  equitably  be 
passed  on  to  the  customer. 


35 


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G)st  Accounting  in  a  Trust  G)mpany. 


General  Subdivision  of  Earnings  and  Costs  in  an  Average  Trust 
Company)  Doing  a  Combination   Trust,  Savings,  Com- 
mercial, Bond  and  Safe  Deposit  Business, 


Financial  Statement  of  the  Average  Trust  Co. 

ASSETS. 

Loans  and  discounts  $1,845,000.00 

Bonds 535.000.00 

Cash  on  hand  and  in  banks 394,000.00 

Furniture  and  fixtures 15,000.00 

Vault  and  safe  deposit  boxes 5.000.00 

$2,794,000.00 
LIABILITIES. 

Capital  and  surplus $    300,000.00 

Undivided  profits   69,000.00 

Commercial  deposits   567.210.00 

Deposits  from  other  banks 375.890.00 

Certificates  of  deposit 196,900.00 

Savings  deposits  1,240,000.00 

Trust  deposits  45,000.00 

$2,794,000.00 
Above  figures  represent  daily  averages  for  a  period  of  one  year. 


Statement  of  Cross  Earnings, 


General  Interest  Earnings. 

Interest  from  loans  and  discounts $  97.400.00 

Interest   from  banks 5.580.00 

Interest  from  bonds 22.410.00 

Exchange  earnings  610.00     $126,000.00 

Less  proportion  earned  by  trust  deposits 2,338.14 

Net  interest  earned  by  com.  and  sav.  depts $123,661.86 

Trust  Department. 

General  trust  earnings,  fees,  etc $6,530.00 

Interest  earned  by  trust  deposits 2.338.14 

Total  earnings  from  trust  department..$8,868. 1 4  8,868. 1 4 

Forward,     $132,530.00 
38 


Forwarded,     $132,530.00 
Safe  Deposit  Department. 
Total  box  rentals  and  storage  charges 2.200.00 

Bond  Department. 

Total  earnings  of  bond  department 7,600.00 

Grand  total  of  all  earnings $142,330.00 

(Distribution  of  general  expense  to  trust,  safe  deposit  and  bond 
departments,  shown  on  line  marked  "A"  on  page  40.  is  based  on  the 
proportion  of  earnings  made  by  each  department  as  shown  above.) 


Summar"^  of  Deposits. 

Conmiercial  deposits  $    567,210.00 

Deposits  of  other  banks 375.890.00 

Certificates  of  deposit 196.900.00 

Total  for  commercial  department..$  1,1 40,000.00 
Savings  deposits  1 ,240.000.00 

Total  commercial  and  savings $2,380,000.00 

Trust  deposits  45.000.00 

Grand  total   $2,425,000.00 


Division  of  Interest  Earnings  Between  Commercial,  Savings  and 
Trust  Departments,  on  Basis  of  Total  Deposits 
in  Each  Department. 
$1,140,000 


$2,425,000 

$1.240.000 
$2,425,000 

$45.000 
$2,425,000 


X  $126.000.00=$59,233.00  for  commercial  dept. 
X  $126.000.00=$64,428.86  for  savings  dept. 


X  $126,000.00=$  2,338.14  for  trust  dept. 


Interest  Paid  Out. 

Interest  paid  to  other  banks $  9,514.00 

Interest  paid  on  commercial  accounts 10,538.00 

Interest  paid  on  certificates 7,226.00 

Total  interest  paid  in  commercial  dept..$2 7.2 78.00     $27,278.00 

Interest  paid  on  savings  accounts 39.405.00 

Interest  paid  on  trust  deposits 868.00 

Grand  total  interest  paid  out $67,551.00 

39 


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Division  of  Net  General  Expense  Between  Savings  and  Connmercial 
Departments  on  the  Basis  of  Total  Deposits  in 

Each  Department. 


$1,240.000 
$2,380,000 
$1.140.000 
$2,380,000 


X  $18.807.33=$9.798.78  for  savings  dept 
X  $18,807.33=$9.008.55  for  commercial  dept 


General  Summary}  of  Net  Earnings  tp  Departments, 


$27,278.00 

9.008.55 

9.336.76 


.$59,233.00 


45.623.31 
.$13,609.69 


Commercial  Department, 

Interest  earnings 

Interest  paid  out  

General    expense    

Detailed  operating  cost  

Net  earnings  

Savings  Department, 

Interest  earnings $64,428.86 

Interest  paid  out $39,405.00 

General  expense  9.798.78 

Detailed   operating  cost 1,632.35        50,836.13 

Net  earnings  $13,592.73 

Trust  Department, 

Trust  earnings,  fees,  etc $  6,530.00 

Int.  earned  by  trust  depos 2,338.14     $  8,868.14 

Expense  trust  department $  4.898.30 

Int  paid  on  trust  deposits....         868.00  5,766.30 

Net  earnings $  3,101.84     $   3,101.84 


$13,592.73 


Total   earnings    ... 
Total   expenses   .... 

Net   earnings 


Bond  Department, 

$  7.600.00 

4.787.14 


..$  2.812.86     $  2.812.86 


Safe  Deposit  Department, 

Total  rentals  and  storage  charges $  2,200.00 

Total  expenses   2,018.12 

Net  earnings  $       181.88 

Grand  total  of  net  earnings 

Less  6%  on  capital,  surplus  and  profits 

Final  net  profits  in  excess  of  6%  on  investment 

41 


$      181.88 

...$33,299.00 
...  20.940.00 

.$12,359.00 


■M'^mmimm^- 


;»»«:^>«.»**t-. , 


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h  » 

t. 


Average  Interest  Rates  Earned  and  Paid. 

Average  rate  earned  on  total  funds  loaned  and  invested 5. 1 958% 

Average  rate  earned  by  bonds 4.188   % 

Average  rate  earned  by  loans  and  discounts 5.279   % 

Average  rate  paid  on  savings 3.177   % 

Average  rate  paid  on  bank  deposits 2.53      % 

Average  rate  paid  on  all  commercial  deposits 1.857   % 

Average  rate  paid  on  trust  deposits 1.93      % 

(In  figuring  interest  on  capital,  surplus  and  profits,  the  $20,000.00 
invested  in  fixtures  and  vault  is  first  deducted,  as  interest  on  these  items 
has  already  been  figured  in  the  costs.) 

It  will  be  noted  that  the  profits  in  the  conunercial  department  are 
much  lower  relatively,  than  in  the  case  of  the  Specimen  National  Bank, 
the  reason  being  that  a  Trust  Company  pays  interest  on  commercial  bal- 
ances to  a  much  greater  extent  than  a  National  bank. 

The  analysis  of  individual  accounts  would  be  based  on  above 
data  and  handled  in  the  same  manner  as  in  the  calculations  for  the 
Specimen  National  Banl^. 

Details  already  shown  in  the  explanation  of  the  Specimen  Na- 
tional Bank*s  business,  are  omitted  here,  the  purpose  here  being  sim- 
ply to  show  those  elements  in  which  a  Trust  Company's  cost  ac- 
counting would  vary  from  that  of  other  banks. 

There  is  a  great  variation  in  the  amount  of  trust  business 
handled  by  banks  having  trust  departments,  or  those  known  as  trust 
companies  and  having  banking  departments.  I  have  endeavored 
to  show  conditions  as  they  are  in  an  average  institution  doing  a  com- 
bination trust  and  banking  business. 

TTie  individual  Trust  Company  will,  of  course,  need  to  adapt 
the  plan  to  its  own  conditions. 


% 


Utilizing   the  Results. 


42 


In  applying  the  results  secured  by  the  analysis  of  costs,  in  a 
general  way,  the  comparative  sheet  showing  costs,  expenses  and 
earnings  by  departments,  as  shown  on  pages  36  and  37,  will  be  of 
the  utmost  value  to  the  officers  and  directors. 

A  study  of  such  a  comparative  sheet  will  quickly  locate  the 
specific  cause  of  an  increase  in  expenses  or  a  decrease  in  earnings. 

In  utilizing  the  analyses  of  individual  accounts,  tact  and  dis- 
cretion must  be  used. 

It  is  not  to  be  inferred  that  the  purpose  of  cost  accounting  is  to 
immediately  throw  out  every  account  that  does  not  pay. 

Its  first  and  greatest  purpose  is  to  l^norv  the  facts,  so  as  to  have  a 
definite,  clean-cut  basis  on  which  to  approach  customers  in  a  really 
intelligent  way,  in  case  their  accounts  require  it. 

Your  first  attention  will  naturally  be  directed  to  your  larger 
accounts,  especially  those  depositing  a  great  many  out-of-town  items. 

Here  is  a  form  of  letter  that  might  be  used  in  the  case  of  a 
bank  customer,  which  will  indicate  the  manner  of  hsmdling  such  cor- 
respondence. The  vital  point  is  to  be  able  to  show  die  customer 
exactly  what  his  account  earns  and  what  it  costs  you  to  handle  it, 
so  that  his  sense  of  fairness  may  be  appealed  to.  Then  the  letter 
must  be  worded  in  a  manner  that  cannot  give  offense.  That  such 
letters  will  secure  increased  balances  has  been  proven  over  and  over 
again. 

(Letter  asking  for  increase  in  balance) 

Mr President, 

Bank, 

My  Dear  Sir — In  looking  over  the  reports  of  our  Analysis  De- 
partment, I  find  that  the  volume  of  your  out-of-town  business  has  shown 
a   progressive   increase  for  some  months  past,   and  while  I  am  indeed 

43 


"-*!H"=i*-»g»>i«;t»W^i,.)4'«uii>jiSj»ij<jJi. 


pleased  to  note  this  evidence  of  your  increasing  business,  I  feel  obliged 
to  call  your  attention  to  the  bearing  this  has  on  the  arrangement  now  in 
force  with  your  bank. 

The  enclosed  analysis  of  your  account  for  the  past  three  months 
diows  that  the  cost  to  us  of  handling  your  growing  out-of-town  business 
has  reached  a  figure  which  makes  the  balance  originally  agreed  upon, 
entirely  inadequate  to  meet  the  present  conditions. 

I  assure  you  that  we  keenly  appreciate  your  business,  the  more 
so  because  of  the  many  years  of  cordizd  relations  that  we  have  enjoyed 
with  you,  but  I  believe,  in  view  of  the  increased  cost  of  handling  your 
account,  that  an  increase  of  $75,000.00  in  the  net  average  daily  balance 
of  your  account  is  necessary  in  order  to  put  it  on  a  mutually  equitable 
basis,  and  trust  that  you  will  agree  with  me  as  to  the  fairness  of  this 
request. 

Thanking  you  in  advance  for  your  consideration,  and  awaiting 
an  expression  of  your  views  in  the  matter,  I  am,  with  kind  regards. 

Very  truly  yours, 

Pres.  The Bank. 


In  the  case  of  a  local  customer,  it  is  desirable  for  some  princi- 
pal officer  of  the  bank  to  take  the  matter  in  charge,  preferably  the 
officer  best  acquainted  with  the  customer.  Here  also  the  advantaige 
of  submitting  an  exact  statement  is  manifest.  If  the  customer  is  not 
convinced  of  the  fairness  of  the  request,  his  inclination  may  be  to  go 
to  some  other  bank.  But  with  a  correct  analysis  showing  exactly 
what  his  account  costs  and  earns,  and  if  approached  diplomatically, 
his  pride  will  be  appealed  to  and  he  will  see  that  an}f  bank  would  be 
justified  in  making  the  same  request  of  him.  He  will  not  desire  his 
account  to  be  looked  upon  as  undesirable,  wherever  placed,  and  will 
willingly  increase  his  balance  or  make  any  other  equitable  arrange- 
ment for  giving  proper  recompense  to  his  bank. 

A  director  in  one  bank  voluntarily  increased  his  balance  after 
looking  over  the  monthly  analyses  of  all  large  accounts  in  the  bank, 
among  which  his  own  had  been  diplomatically  included. 

In  the  case  of  small  accounts,  there  is  but  one  really  proper  so- 
lution.   All  commercial  accounts  carrying  balances  below  the  profit 

44 


4: 

\ 


' 


\ 


. 


line  should  be  charged  a  certain  fee  per  month  for  the  handling  of 
the  account.  This  is  already  done  in  some  banks  in  certain  quarters 
of  New  York  City,  but  its  extension  to  the  country  at  large  will 
doubtless  be  long  in  coming,  for  it  involves  the  education  of  the  pub- 
lic and  even  of  many  bankers,  to  the  justice  of  such  action. 

Temporarily,  many  small  accounts  will  be  carried  at  a  loss, 
for  the  sake  of  the  good  accounts  that  may  be  developed  from  them. 

It  is  not  impossible,  however,  to  weed  out  some  of  the  most  un- 
desirable ones  and  to  adopt  a  policy  of  selection  in  the  taking  on  of 
new  business  of  this  character. 

A  bunch  of  small  accounts,  even  in  the  aggregate,  represent  a 
small  tax  on  the  bank,  and  this  may  be  offset  by  their  good  will  and 
future  possibilities. 

If,  on  careful  analysis,  all  your  large  accounts  show  a  profit, 
you  can  wait  with  some  patience  for  the  day  when  a  fee  can  be 
charged  for  the  clerical  work  of  handling  small  accounts. 

Cost  analysis  finds  its  greatest  rewards  among  the  large  ac- 
counts with  fteavp  deposits  of  out-of-town  items. 

In  a  country  bank,  any  effort  to  secure  larger  balances  from 
farmers  and  even  from  many,  sn^all  sto>eteopers,,  ):y  means  of  an 
analysis  of  their  accounts,  would  be  foredoomed  to  failure.  The 
farmer's  attitude  of  mind  tOA'avd  a  bc^ik  and  his  preconceived  ideas 
would  put  it  entirely  out  of  the  question. 

The  country  banker  properly  solicits  mucli  business  that  he 
knows  will  not  pay  strictly  on  its  own  merits. 

But  he  wants  the  financial  life  of  the  community  to  flow 
through  his  bank.  He  wants  the  influence  and  the  friendship  of 
every  man  in  the  community,  and  he  does  this  free  work  to  get  it. 
It  is  part  of  his  advertising  bill.  In  many  places  it  forestalls  com- 
petition. 

But  the  country  banker  needs  to  understand  costs. 

He  should  be  able  to  judge  the  fairness  of  the  balances  that 
may  be  requested  from  him  by  his  depositary  banks  in  the  cities. 

45 


He  perhaps  has  the  account  of  some  outside  company  doing  a 
considerable  business  in  his  town  in  the  purchase  of  wool,  cotton, 
grain,  potatoes  or  timber. 

And  perhaps  the  money  is  checked  out  by  the  local  agent  about 
as  fast  as  it  is  deposited. 

This  will  be  a  good  instance  in  which  to  submit  an  analysis 
showing  cost  and  lack  of  earnings  and  to  request  either  a  larger 
balance  or  a  charge  based  on  the  volume  of  business  handled  for 
them. 

TTie  local  agent  receives  compensation  for  his  own  work  and 
understands  the  convenience  and  value  of  the  service  the  bank 
renders,  and  he  will  usually  co-operate  willingly  in  securing  the 
necessary  arrangement  with  the  firm  he  represents. 

In  one  country  bank,  three  or  four  such  adjustments  have 
netted  the  bank  over  $  1 00.00  a  year  in  increased  exchange  charges. 

There  is  no  reason  whatever  why  the  country  bank  should  pay 
express  charges  on  currency  shipped  in  and  lose  interest  on  the 
money  while  in  transit,  for  the  purpose  of  cashing  checks  for  some 
outside  concern  which  carries  only  an  infinitesimal  balance. 

In  a  savings  bank^  cost  analyses,  gives  a  definite  basis  from 
which  to  determine,  vyhat  rate.of.  int^e^t^  and  what  rules  as  to  the 
computation  of  same,  are  most  equitable  to  the  bank  and  to  its  cus- 
tomers.  This  njatter  hai^  already  i>een  quite  thoroughly  covered,  be- 
ginning on  page  23. 


■t 


The  Analysis  of  Advertising  Methods  in  a  Bank. 


46 


The  tendency  in  all  business  is  toward  more  careful  analysis 
of  conditions,  to  the  elimination  of  misdirected  energy  and  to  the  in- 
telligent and  systematic  use  of  every  legitimate  means  of  increasing 
business  profits. 

Tlie  cost  of  getting  business  and  of  doing  business  is  being 
studied  searchingly  that  both  may  be  lowered  and  that  profits  may 
be  increased  through  the  adoption  of  a  policy  that  pushes  those 
features  naturally  most  profitable,  and  that  eliminates  or  changes 
those  features,  existing  in  almost  every  business,  which  lose  money 
and  therefore  lessen  the  gain  on  the  profitable  lines. 

Many  pages  could  be  filled  with  true  stories  of  manufacturing 
successes  built  out  of  failures,  of  costs  reduced,  wages  increased, 
working  hours  shortened,  products  improved, — all  by  the  introduc- 
tion of  scientific  business  methods. 

Salesmanship  is  being  studied  as  a  science  and  every  aid  to  the 
economical  securing  of  business  is  being  employed  with  an  intelli- 
gence undreamed  of  a  decade  ago. 

The  lowering  of  costs  resulting  from  increased  volume  of  busi- 
ness is  keenly  appreciated  and  it  is  fully  realized  that  every  dollar 
of  new  business  pays  a  double  profit,  first  its  own  natural  profit  and 
second  the  added  profit  it  creates  by  lifting  from  the  business  already 
acquired,  a  certain  portion  of  overhead  expense. 

This  is  as  true  in  a  banl^  as  in  a  factory.  A  considerable  pro- 
portion of  expense  is  fixed.  The  ratio  it  bears  to  earnings  and  the 
consequent  rate  of  profit  depends  largely  on  the  volume  of  business 
done. 

A  twenty-five  per  cent,  increase  in  volume  of  business,  increases 
profits  far  more  than  twenty-five  per  cent.,  by  reducing  the  ratio  of 
general  expenses  on  the  whole  volume  of  business  done. 

47 


!  I 


In  planning  to  increase  the  business  of  a  bank,  the  same  as  in  a 
factory,  the  first  question  is,  what  class  of  business  to  strive  to  in- 
crease, in  other  words,  what  is  the  most  profitable  class  of  business 
handled. 

Hence,  it  follows  that  the  subject  of  costs  is  intimately  asso- 
ciated with  any  truly  intelligent  plan  for  increasing  deposits. 

The  question  of  costs  enters  in  many  ways :  for  instance,  it  costs 
less  to  keep  an  old  customer  than  to  get  a  new  one,  therefore  plans  for 
increasing  business  if  as  broad  as  they  should  be,  include  plans  for 
retaining  old  customers,  for  preventing  needless  withdrawals  from 
savings  accounts,  for  fostering  the  interest  and  the  loyalty  to  the  in- 
stitution of  so-called  established  trade. 

The  term  advertising  was  formerly  and  is  today,  in  most  cases, 
taken  to  mean  a  standing  card  in  the  papers  and  a  little  spasmodic 
work  by  mail,  with  no  definite  aim  and  based  on  no  careful  analysis 
of  conditions,  and  done  purely  on  theory. 

The  results  of  such  poorly  applied  effort  are  naturally  small 
and  have  led  to  the  conclusion  on  the  part  of  many  that  advertising 
is  a  gamble. 

As  a  matter  of  fact,  advertising  is  a  mighty  force.  While  it  has 
built  many  fortunes,  its  real  power,  when  intelligentl})  directed^  is 
only  just  beginning  to  be  fully  understood. 

The  percentage  of  waste  effort  has  been  tremendous.  That, 
with  all  this  waste,  there  has  still  been  a  large  profit  to  many  adver- 
tisers, is  proof  that  advertising  holds  a  latent  power  which,  with  in- 
telligent handling,  is  nothing  short  of  amazing. 

If  a  factory  whose  sales  are  not  up  to  the  profit-paying  volume, 
can  spend  money  for  advertising  and  thereby  increase  sales  to  the 
point  where  a  profit  is  made  after  pacing  for  the  advertising,  who 
shall  say  that  intelligent  advertising  is  an  expense? 

Rather  is  intelligent  advertising  expenditure  an  econom])  for  it 
lessens  expense  ratios  to  a  greater  extent  than  its  own  cost,  in  a  hank 
as  Tvell  as  in  a  factory, 

A  city  bank  with  one  million  of  deposits  has  hard  work  to  make 

48 


4 


ends  meet,  with  two  millions  it  shows  a  nominal  profit  account,  with 
three  millions  or  more  the  profit  begins  to  reach  a  satisfactory  stage. 

But  about  the  time  the  deposits  reach  two  millions  the  bank 
staff,  from  the  president  down,  is  so  occupied  with  the  handling  of 
the  business  acquired  that  there  is  little  time  to  study  how  to  develop 
new  business. 

When  this  point  is  reached  it  is  time  for  the  bank  to  install  an 
advertising  department  under  the  general  direction  of  an  expert  in 
this  line,  with  clerical  help  whose  specific  duty  is  to  carry  out  the 
details. 

This  department  should  carefully  analyze  costs  and  profits  and 
study  the  bank's  field  and  direct  its  publicity  in  a  broad  way.  A 
real  advertising  manager  is  a  trusted,  confidential  counsellor  in  the 
han}{s  Tvork  and  not  a  mere  copy  writer. 

Such  a  department,  while  its  costs  will  be  charged  to  expense, 
and  while  at  the  start  it  will  be  an  expense,  will,  in  the  end,  be  the 
most  profitable  department  in  the  bank. 

It  will  work  both  ways,  as  a  producer  of  profitable  business  and 
as  a  department  for  reducing  costs,  by  lowering  the  expense  ratio  by 
means  of  an  increasing  volume  of  business. 

Much  advertising  advice  is  based  on  the  desire  of  some  adver- 
tising salesman  to  dispose  of  his  wares,  and  is  unsupported  by  any 
definite  data  as  to  what  can  be  accomplished.  It  considers  at  best 
merely  a  detail  of  advertising  method  rather  than  any  comprehensive 
plan. 

There  are  comparatively  few  men  who  have  had  the  opportu- 
nity to  really  k^orv  anything  of  definite  value  regarding  the  actual 
results  of  bank  advertising. 

Only  the  man  who  has  worked  intimately  with,  rather  than  for, 

a  large  number  of  banks,  who  has  so  held  their  confidence  as  to  be 

trusted  with  the  inside  figures  as  to  results,  who  has  accumulated  a 

mass  of  data  showing  the  results  of  all  kinds  of  business-building 

effort,  is  really  able  to  analyze  conditions  and  formulate  a  plan  on 

which  a  conservative  banker  should  care  to  appropriate  the  bank's 

money. 

49 


IJ 


«-«;^«»*» 


"■J 


But  such  expert  knowledge  is  to  be  had  and  the  banker  who 
avails  himself  of  it  and  follows  an  advertising  campaign  laid  down 
on  correct  lines,  will  indeed  find  that  he  has  discovered  a  neiv  force 
in  banking. 

It  is  no  longer  necessary  to  accept  advertising  theory.  The 
author  of  this  book  is  today  and  has  been  for  some  years,  handling 
the  advertising  departments  of  many  banks  which  spend  liberal 
amounts  and  where  the  advertising  department  is  first  of  all  an 
analyticeil  department.  These  banks  expect  and  do  receive  from 
their  advertising  departments  the  same  efficiency,  the  same  shov/ing 
of  results,  the  same  exhibition  of  profit  that  they  demand  from  all 
other  departments. 

It  is  entirely  within  bounds  to  say  that  it  will  completely  sur- 
prise the  average  banker  who  will  investigate,  to  learn  how  scientif- 
ically advertising  can  be  handled,  to  discover  that  this  line  of  work 
has  been  reduced  to  such  a  definite  basis  that  it  is  practicable  to  pre- 
dict within  reasonable  limits  what  can  be  accomplished  by  a  given 
expenditure,  handled  in  a  given  way. 

The  analysis  of  costs  to  determine  which  classes  of  business 
pay  the  best  profit  and  the  methods  of  planning  advertising  to  accom- 
plish an  increase  in  these  particular  lines  have  been  worked  out  prac- 
ticall}^  and  can  be  proven  from  actual  records. 

This  whole  subject  is  one  of  absorbing  interest  to  the  banker 
who  wants  his  institution  to  grow  and  to  make  the  utmost  profit. 

Advertising  so  handled  is  on  an  entirely  new  plane,  vastly  dif- 
ferent from  the  old  hit  or  miss  style.  It  is  truly  a  nenf  force  in 
banking. 


I 

1 


^ 


Foot  Note. 

To  get  average  amount  in  transit  daily.     Compile  items  not  con- 
vertible on  da}^  received  for  a  period  of  one  month  as  follows: 

Total  of  (Time  figured  from  Chicago.) 

$  1 0,000  on  St.  Louis  2 14  days  in  transit=$  25,000  for  one  day 

25,000  on  Omaha  3      days  in  transit=      75,000  for  one  day 

25.000  on  Spokane  8      days  in  transit=  200,000  for  one  day 

5,000  on  Grand  Rapids  2       days  in  transit=      1 0,000  for  one  day 

$65,000 
$310,000 


$  65.000 

$3 1 0,000 
31 

$65,000_ 
31 


$3 1 0.000  out  one  day 
equals  4.7629  average  days  each  dollar  is  in  transit. 


equals  $10,000.00  average  daily  amount  in   transit  to  be 
deducted  from  apparent  balance  to  give  true  balance. 

PRCHDF. 

$2,096.77  average  daily  deposit   X   4.7629  average  days 
oul=$  10,000.00,  average  daily  amount  in  transit. 


50 


Counting  Items. 

The  one  thing  in  this  system  of  cost  accounting  which  is  most 
often  questioned  is  the  use  of  a  per-item  cost.  And  the  criticism 
never  is  that  the  principle  is  incorrect,  but  that  the  work  involved 
would  be  excessive. 

With  present  facilities  and  methods,  this  may  be  true  in  very 
large  banks;  but,  once  grant  that  a  bank  must  know  its  costs,  and 
that  the  cost  of  handling  items  is  a  fundamental  and  necessary  fac- 
tor to  consider  in  cost  accounting,  and  there  can  be  no  question  but 
that  the  ability  of  bank  accountants  and  the  ingenuity  of  the  adding 
machine  manufacturers  will  be  equal  to  devising  simple  and  easy, 
if  not  nearly  automatic  means  for  doing  this  counting.  Automatic 
counting,  weighing  and  measuring  are  a  necessary  part  of  the  busi- 
ness system  of  thousands  of  offices  and  factories. 

That  banks  will  continue  for  all  time  to  render  services  without 
proper  compensation,  merely  for  lack  of  facilities  for  easily  keeping 
account  of  those  services,  is  unbelievable. 

31 


*  *-yv   f--^   r  ^.^,  j,^     W*** 


The  following  method  ot  compiling  items,  written  by  the  Aud- 
itor of  a  bank  having  assets  of  about  $3,000,000.00  will  be  of  in- 
terest to  those  who  may  have  looked  upon  the  counting  of  items  as 
impractical. 

ji  j"  '*^*'*^  ^^  ^^  manner  in  which  I  arrived  at  the  total  number  of  items 
handled  m  the  course  of  the  year,  in  this  bank,  I  will  say  that  I  had  a  sheet 
of  paper  ruled  off  in  cij^it  columns,  the  columns  being  headed:  Commercial 
deposits,  commercial  checks,  foreign  items,  clearing  house  items,  post-office 
money  orders,  savings  deposits,  savings  withdrawals,  and  certificates  of  de- 
posit. On  the  left  hand  side  of  the  sheet,  running  down  the  page.  I  had  the 
dates  from  August  1  st  to  August  3 1  st.  I  used  the  items  handled  in  August, 
multiplied  by  twelve,  to  give  me  the  estimate  for  the  year. 

*'In  this  bank  it  is  a  comparatively  easy  matter  to  find  the  number  of 
items  handled  each  day.  as  all  our  checks,  deposits,  clearing  house  items  and 
post-office  orders  arc  run  on  adding  machines  on  wide  sheets,  which  arc  filed 
away.  On  getting  these  sheets  out,  I  first  turned  to  that  of  August  I  st.  and 
counted  the  commercial  deposits,  placing  the  number  in  the  first  column  imder 
die  heading  of  conunercial  deposits  and  opposite  the  date  of  August  I  st.  I 
then  coimted  the  number  of  commercial  checks  on  us.  entering  same  on  the 
same  line,  but  in  tfie  second  column.  The  number  of  savings  deposits  was 
entered  in  the  third  column,  savings  withdrawals  in  the  fourth  column,  clear- 
ing house  checks  in  the  fifth,  and  so  on.  The  foreign  item  or  items  sent  away 
for  credit  or  remittance,  we  counted  by  referring  to  the  copy  of  the  letter  in 
which  the  items  were  sent  away. 

"By  repeating  this  operation  for  each  working  day  during  the  month. 
then  getting  the  grand  total,  and  multiplying  same  by  twelve,  I  arrived  at  the 
estimated  number  for  the  year.  In  arriving  at  the  number  of  items  in  the 
savings  dq)artment.  I  was  obliged  tp  go  through  the  savings  deposit  slips  and 
count  all  items  listed  thereon,  and  deduct  the  total  from  the  above  total,  the 
remainder  being  the  commercial  items. 

"In  this  bank  the  express  orders  are  included  in  the  foreign  items,  as 
we  send  them  all  to  New  York  for  credit.  If  a  bank  cashes  express  orders 
in  its  home  town,  it  would  be  well  to  add  another  colimin  to  tfic  item  sheet. 

"In  getting  the  number  of  items  handled  for  an  account  under  analysis, 
for  the  period  of  say  one  month,  I  counted  all  the  items  listed  on  the  deposit 
slips,  and  to  this  total  added  the  number  of  checks  paid  and  deposits  made 
as  shown  by  the  individual  ledger  sheet  for  that  account  In  my  opinion  it 
would  be  a  good  plan,  at  the  close  of  business  each  day,  to  make  a  record  of 
the  number  of  items  handled  during  the  day  for  each  account  under  analysis, 
also  if  any  foreign  items  are  deposited,  the  amount  and  the  time  which  it  will 
take  to  collect  the  funds. 

"There  are  undoubtedly  many  banks  that  do  not  list  their  items  on  the 
adding  machine,  as  we  do.  but  in  all  banks  somewhere  on  their  records  there 
is  a  complete  itemized  list,  and  counting  the  items,  which  appears  at  first 
bhish  to  be  a  staggering  proposition,  is  in  reality  but  the  work  that  a  junior 
clerk  can  do  during  his  spare  time." 

52 


COLUMBIA  UNIVERSITY  LIBRARIES 


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Thomas 

Cost  accounting  in  a  bank. 


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COLUMBIA   UNIVERSITY   LIBRARIES 

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